admin
The economic outlook for Canada’s diverse provinces, while inherently complex to forecast, is showing unexpected signs of resilience against persistent U.S. trade pressures. This newfound stability, coupled with significant historical revisions to economic data, positions most provinces on a more favourable fiscal footing as they prepare for the 2026 budget season, according to a comprehensive new analysis from Desjardins. This optimistic, albeit cautious, assessment underscores a dynamic period for Canadian economic policy, marked by both lingering challenges and emerging opportunities.
Randall Bartlett, Deputy Chief Economist at Desjardins and a co-author of the insightful report published Tuesday, highlighted the extraordinary challenges currently faced by economists and policymakers alike in accurately charting future economic trajectories. He noted that a multitude of developments, some occurring even after the provinces delivered their fall fiscal updates, illustrate the volatile and unpredictable nature of the current global economic environment. "It is a much more difficult time to be doing forecasting for any economy, really," Bartlett observed, emphasizing the increased uncertainty that pervades global markets. This sentiment resonates across the financial sector, where traditional forecasting models are being continuously recalibrated to account for rapid geopolitical shifts, supply chain disruptions, and evolving consumer behaviours.
The Evolving Budget Season: A Provincial Snapshot
The provincial budget season is set to commence with British Columbia leading the charge, presenting its fiscal plan on Tuesday. Alberta is slated to follow suit the subsequent week, with other provinces expected to unveil their own fiscal updates in the coming months. This annual ritual of fiscal transparency is particularly anticipated this year, given the confluence of domestic and international factors influencing provincial coffers. The federal government, in a move aimed at enhancing intergovernmental coordination, shifted its own budget schedule to the fall last year. This change was justified, in part, as a strategic measure to provide provinces with greater clarity regarding Ottawa’s spending plans and economic projections well in advance of their own fiscal deliberations, theoretically allowing for more integrated and responsive provincial budgeting.
Bartlett recalled that at this time last year, the prevailing outlook for provincial economies was considerably more pessimistic. The spectre of then-U.S. President Donald Trump’s repeated threats of imposing widespread tariffs loomed large, casting a pall of uncertainty over Canada’s economic future. The fear was that a comprehensive trade war could severely cripple export-dependent sectors and trigger a broad economic slowdown.
Mitigating Trade Shocks: CUSMA’s Unexpected Buffer
While some sharp tariffs did indeed materialize, impacting specific sectors and regions—most notably weighing heavily on Ontario’s steel and automaking industries, and Quebec’s vital aluminum sector—the broader economic fallout was less severe than initially feared. Bartlett attributed this partial insulation to a critical exemption for goods compliant with the Canada-U.S.-Mexico Agreement (CUSMA). This trade accord, which replaced NAFTA, incorporated provisions that shielded a significant portion of cross-border trade from the more punitive measures of Trump’s protectionist agenda. Without CUSMA’s framework, analysts suggest the economic damage could have been far more profound, potentially leading to widespread job losses and a significant contraction in export volumes.
For instance, the steel and aluminum tariffs, imposed under Section 232 of the U.S. Trade Expansion Act, undeniably hurt manufacturers in provinces like Ontario and Quebec, leading to price increases, reduced orders, and operational uncertainties. However, the comprehensive nature of CUSMA, which governs approximately $2.6 billion in daily bilateral trade, prevented a cascading effect across other critical sectors like agriculture, energy, and advanced manufacturing, which maintained largely tariff-free access to the lucrative U.S. market. This distinction proved crucial in stabilizing the Canadian economic landscape.
Statistical Revisions Provide a Timely Boost
Adding another layer to the improved provincial outlook were recent historical revisions to gross domestic product (GDP) data published by Statistics Canada in November. These updates, which incorporated new information gleaned during the pandemic recovery era, notably raised previous estimates of GDP for both 2022 and 2023 across the board. Such revisions are not uncommon as statistical agencies refine their methodologies and integrate more complete data sets. In this instance, the upward adjustments were particularly significant, providing a welcome statistical lift to the economic narrative.
Bartlett underscored the importance of these revisions, noting that they helped to alleviate some deeply seated concerns regarding stagnating per capita GDP and Canada’s persistently weak productivity growth. For years, economists and policymakers have grappled with Canada’s struggle to improve productivity, a key driver of long-term prosperity. The revised data, even if only retrospectively, painted a slightly more robust picture, suggesting that the economy had performed better than initially believed during a period of significant global upheaval. This recalibrated baseline, in turn, positioned the provinces on a more solid economic footing than first expected as they prepared to navigate ongoing trade tensions and other global economic uncertainties. "Overall, the provinces, I think, economically have fared better than we had previously expected in our last provincial outlook," Bartlett confirmed, reflecting a tangible shift in sentiment from a year prior.
Navigating 2026: New Risks and Regional Variations
The transition from a better-than-expected 2025 performance to the crafting of the 2026 budgets will not be uniform across Canada. While the overall picture has brightened, new risks have simultaneously materialized since the fall, demanding careful consideration from provincial finance ministries.
A primary concern remains trade tensions with the United States, which are anticipated to reach a critical juncture this year with the scheduled review of CUSMA now underway. This mandated review provides an opportunity for all three signatory nations to assess the agreement’s effectiveness and propose adjustments. Given the current political climate in the U.S., particularly with a potential return of a protectionist administration, this review carries significant weight and could reignite tariff threats.
Central Canada, encompassing Ontario and Quebec, remains the most exposed region to the potential re-imposition of broad U.S. tariffs. Their deeply integrated manufacturing sectors, especially in automotive, steel, aluminum, and aerospace, are highly susceptible to trade disruptions. Bartlett specifically highlighted recent attempts by the U.S. president to target Quebec’s aerospace industry, signaling a potential flashpoint. Any new tariffs or trade barriers in these sectors could have immediate and severe repercussions for employment and economic output in these provinces. Industry associations in both provinces are reportedly advocating for proactive engagement with U.S. counterparts to mitigate potential risks during the CUSMA review.
In contrast, British Columbia, Saskatchewan, and most of the Atlantic provinces appear better positioned, primarily due to their more diversified trade portfolios and, in some cases, a greater orientation towards Asian or European markets. For instance, BC’s economy benefits from its robust port infrastructure and its role as a gateway to Asia, handling a wide array of goods from natural resources to technology.
The China Factor: Diplomacy and Market Access
Moreover, several provinces could reap significant dividends from the federal government’s renewed diplomatic efforts with China. After a period of strained relations, Canada has been working to stabilize its trade relationship with the economic giant. These efforts are expected to lead to a reduction or removal of tariffs on key Canadian exports. Saskatchewan, a global agricultural powerhouse, stands to gain substantially from reduced Chinese tariffs on canola, a commodity that has faced previous trade barriers. Experts suggest a full restoration of market access could boost Saskatchewan’s agricultural revenues by hundreds of millions of dollars annually.
Similarly, increased trade with China could see a surge in exports flowing overseas from British Columbia’s strategically important ports, further bolstering its economic growth. Bartlett also pointed to anticipated improvements in the respective outlooks for the Maritime provinces, benefiting from reduced Chinese tariffs on seafood, and Manitoba, which is expected to see improved market access for its pea exports. These developments underscore the importance of diversified international trade relationships in buffering against regional vulnerabilities.
Geopolitical Risks: The Venezuelan Oil Dynamic
Beyond trade, a significant geopolitical risk could threaten the fiscal picture of Canada’s oil-producing provinces: Alberta, Saskatchewan, and Newfoundland and Labrador. The Desjardins report flags potential regime change in Venezuela as a critical factor. If political stability returns to the South American nation, and international sanctions are eased, it could lead to a substantial increase in Venezuelan heavy oil production.
Should more of this heavy oil eventually make its way to the U.S. Gulf Coast refineries, a primary market for Canadian crude, it would likely depress global oil prices, particularly for heavy blends. This scenario risks delaying investment in Canadian domestic oil production, as projects become less profitable, and could lead to a reduction in overall GDP in these energy-dependent provinces in future years. "That leads to reduced profitability for energy companies, which can lead to reduced production, reduced employment and also reduced revenues for the provincial government," Bartlett explained, outlining a clear chain of economic consequences. The uncertainty surrounding this geopolitical development adds another layer of complexity to fiscal planning for provinces heavily reliant on energy revenues.
Alberta’s Fiscal Strength Amidst Volatility
Despite the inherent risks associated with volatile energy markets, Alberta, often referred to as the Wild Rose province, enters 2026 with arguably the cleanest fiscal position among its provincial counterparts. This strength is largely attributed to its proactive implementation of various cost-cutting measures and a commitment to fiscal prudence in recent years. Alberta’s efforts to diversify its revenue streams and control public spending have provided it with a stronger financial buffer against potential commodity price shocks.
Bartlett acknowledged Alberta’s strategic positioning: "I think there is an opportunity to find further savings for Alberta and ultimately position themselves well for when we get hopefully a more certain and less volatile regime for global energy prices." This suggests that even with potential headwinds from Venezuelan oil, Alberta’s underlying fiscal discipline offers a degree of resilience and the capacity to weather future market fluctuations more effectively than provinces with less robust fiscal foundations.
Varied Provincial Approaches and Outlooks
Bartlett reflected on the diverse strategies adopted by provinces a year ago when confronting the potential impact of Trump-era tariffs on their fiscal paths. This divergence in approach will likely manifest in varied performances against their 2025 budget projections. Despite the ongoing trade headwinds, Bartlett noted that Ontario and Quebec, in particular, had incorporated a strong degree of "prudence" into their budgets last year. This conservative fiscal planning means they are likely to present relatively rosier fiscal outlooks when they deliver their updates in the coming weeks, having accounted for potential negative scenarios.
"We’re expecting some (provinces) to have underperformed or overperformed their Budget 2025 numbers when budget season’s over. But ultimately we’ll probably come around pretty close to where the budget numbers were in 2025, with the exception of maybe Alberta and some of the other energy-producing provinces," he concluded. This indicates that while the overall picture for most provinces is one of unexpected stability, specific regional economic drivers, particularly in the energy sector, will create notable deviations.
Broader Implications for Canada’s Economic Future
The Desjardins report, therefore, paints a nuanced picture of Canada’s provincial economies. While the unexpected resilience and upward data revisions offer a momentary sigh of relief, the persistent threat of protectionist trade policies, evolving geopolitical energy dynamics, and the inherent difficulties of forecasting in a volatile world underscore the need for continued vigilance and adaptive fiscal management. The improved footing, however, offers provinces a window of opportunity to address long-standing structural issues, such as healthcare funding pressures, infrastructure deficits, and the imperative to foster long-term productivity growth.
For the federal government, the varied provincial fiscal health will undoubtedly influence discussions on federal-provincial transfers and the implementation of national programs. A stronger provincial fiscal outlook might reduce immediate pressures for federal aid but could also empower provinces to push for greater autonomy in certain policy areas. Investor confidence, both domestic and international, will closely watch these budget announcements for signs of fiscal stability and strategic vision, which are crucial for attracting capital and fostering economic expansion. The 2026 budget season, therefore, is not merely an exercise in financial accounting but a critical barometer of Canada’s economic health and its ability to navigate an increasingly complex global landscape.
